Do macro shocks affect REIT's ability to issue accelerated equity offerings? Evidence on common block ownership

This study highlights the interconnectedness between ownership structure and external equity funding liquidity, specifically changes in passive cross-block ownership concentration due to initial membership in the S&P500 or MSCI. Using a simultaneous equation bivariate model, we show a reduction in financial constraint. Cross-block ownership increases the likelihood of Real Estate Investment Trust (REIT) accelerated seasoned equity offerings' (SEO) issuances and less negative share price reactions, particularly during the 2008 Great Recession, a period that created acute funding challenges for REITs that must pay 90% of earnings in dividends. Sun et al. (2015) report that “those REITs that were saddled with excessive debt coming due at the height of the crisis (with many companies having in excess of 50% of total debt due in 2008 and 2009) were often forced to sell property at unattractive prices and issue equity at a lower value in order to meet the terms of their loans.” Therefore, the ability to issue accelerated SEOs during financial crises, a period when credit and bond markets are tight, is surprising because accelerated SEOs are often perceived negatively by the capital market (Howton, et al. 2018). Understanding REITs' limitations to external equity is an important liquidity supervision issue, especially since real estate is an important part of the macroeconomy that ignited the 2008 Great Recession (Ling, et al. 2016).

Using multinomial logit and bi-probit models, results are consistent with industry-focused common investors with passive index strategies providing equity funding stability for REIT stocks. SEOs are obtained from the Securities Data Company (SDC) U.S. database using Standard Industrial Classification (SIC) code 6798. Ott, et al. (2005) report that 93% of REIT investments are funded through external equity sources relative to only 30% of the industrial firms. The SDC data are supplemented with Compustat financial and Center for Research on Security Prices (CRSP) stock data. Two cross-block ownership measures are estimated: 1) a dichotomous variable identifying addition to an index and 2) a modified Herfindahl-Hirschman ownership concentration index from individual block holders with at least 5% ownership from each REIT’s proxy statements. Announcement of initial index membership (an increase in both demand and supply for equity shares) the recent financial crisis (which sharply reduced the supply of funding from banks, non-banks and capital markets) are considered to be plausibly exogenous sources of variation in management’s decision to issue SEOs. Assignment of REITs into an index is mostly random.